Aid Plan Could Lower Payments on More Underwater Mortgages

USA Today

After months of criticism that it hasn't done enough to prevent foreclosures, the Obama administration is announcing a plan to reduce the amount some troubled borrowers owe on their home loans.

The effort will let people who owe more on their mortgages than their properties are worth get new loans backed by the Federal Housing Administration, a government agency that insures home loans against default.

That would be funded by $14 billion from the administration's existing $75 billion foreclosure-prevention program. In addition, the homeowner's existing mortgage company will get incentives to lower the principal balances on underwater loans.

The plan, announced Friday, would also enable the borrowers' existing mortgage companies to receive incentives to lower their principal balances.

To be eligible for the FHA refinancing program, borrowers who owe more than the value of their homes, known as being "under water," must not have fallen behind on their existing mortgage payments.

Separately, the program also would reduce monthly payments for unemployed homeowners for up to six months.

The administration cautioned that the plan isn't intended to stop all foreclosures or assist all troubled homeowners.

"There's no intention here of tackling what may be 10 to 12 million foreclosures over the course of the next three years," said Diana Farrell, a White House economic adviser.

Instead, officials said, the goal is to make it more likely the administration will meet its original target, announced last year, of assisting 3 million to 4 million struggling homeowners.

That would be "enough to provide help to those for whom help is worthwhile ... and to provide some kind of stability in the market."

The plan won't assist investors and speculators or "Americans living in million dollar homes or defaulters on vacation homes," an administration fact sheet said.

Some homeowners will not be able to afford to stay in their homes because they bought more than they could afford, officials said.

To help borrowers who have been hurt by falling home prices, the government also will require mortgage servicers to consider cutting a loan's principal if it is up to 15% more than the home is worth, officials said.

The principal would be reduced over three years as long as the borrower stays current on payments.

In addition, servicers will get more incentives — double the amount the government now pays to lenders — if they reduce the unpaid balance of second loans.

The changes reflect a new attack by the Obama administration to address the foreclosure crisis, which at first was driven by subprime mortgages going delinquent, and now is being fueled by unemployment.

The current program provides modified mortgages to homeowners who show proof of income.

"The cost is going to depend on the participation rate. In terms of the cost to taxpayers, the cost of not doing something is greater than doing something," says Scott Talbott, senior vice president for government affairs at the Financial Services Roundtable. "Up to now, there was no government program to help the unemployed, and that was the biggest problem."

The federal program, known as the Home Affordable Modification Program (HAMP), is aimed at helping up to 4 million Americans avoid foreclosure. So far, about 170,000 homeowners have been granted permanent modifications with lower monthly payments through the plan.

Also Thursday, the Treasury Department announced new measures that buy time for some borrowers to avoid losing their homes to foreclosure.

Lenders soon will be unable to start foreclosures unless they've determined borrowers aren't eligible for a modification.

Other changes announced Thursday will provide other protections for troubled homeowners. They include:

•Ensuring servicers intervene once two or more mortgage payments are missed and actively solicit borrowers for the federal program.

•Setting a 30-day deadline for lenders to decide applications for trial modifications.

•Requiring servicers to consider borrowers who file for bankruptcy-court protection for the HAMP program if the borrower, their lawyer or bankruptcy trustee make a request.

The four big holders of second mortgages —Citigroup, Bank of America, Wells Fargo and JPMorgan Chase — have now joined the government's program to modify second mortgages. That program was delayed for months but with Citi on board, the major players in the New York homeowners insurance industry are now participating.

Critics have complained that the Obama administration has done little until now to encourage banks to cut borrowers' principal balances on their primary loans. Nearly one in every three homeowners with a mortgage are "under water" — they owe more than their property is worth — according to Moody's Economy.com.

States Mortgage Relief Programs Aren't Helping Much

As the Senate continues work on its $15 billion mortgage relief bill next week, states will be keeping a close eye on one measure: it would authorize them to issue an additional $10 billion of tax-exempt housing bonds to fund mortgage programs.

Up until now, efforts by states to help distressed homeowners refinance have had negligible results. The new measure would give them additional tools. Still it's unlikely to help them refinance large numbers of borrowers with subprime mortgages.

States currently can sell tax-exempt bonds to finance mortgage assistance to first-time home buyers and those who buy homes located in economically disadvantaged areas. The proposed legislation would allow states to use these bonds to help homeowners refinance as well and allow states to issue more tax exempt bonds to finance their mortgage programs. The additional funds would be allocated on a per capita basis.

Some states are already trying to help. In an effort to stem rising foreclosures, nine states -- including Ohio, Maryland, Illinois and New York -- have started or are preparing to start refinance programs aimed at subprime borrowers facing interest-rate resets, according to the National Governors Association.

The problem, however, is that the refinance programs are turning out to be far less effective than officials had hoped, in part because borrowers seeking state help tend to be in such bad financial shape they don't qualify. Healthier borrowers are bypassing the state programs and seeking other options to refinance their subprime loans, such as the Federal Housing Administration, which has already refinanced 145,000 mortgages in the past seven months.

"Our experience, like the experience of other states, is that refinance programs have limited success," says Philip Lentz, a senior vice president with the State of New York Mortgage Agency, which has refinanced just three borrowers since its "Keep the Dream" program, aimed at those with subprime mortgages, began accepting applications in September; it has another 17 loans in the pipeline. The legislation "will allow us to be more flexible," Mr. Lentz says. But it won't, for instance, make it possible to refinance borrowers whose loans are underwater.

Other state officials say the measure would lower their costs, making the loans they offer a more attractive alternative. They say it also would allow them to make more loans to first-time homebuyers and help homeowners who aren't in serious financial trouble refinance.

"It adds another tool for us," says Clarence J. Snuggs, deputy secretary of the Maryland Department of Housing and Community Development. "But I don't think refinancing is going to resolve the lion's share" of mortgage problems, he adds. "Restructuring [loans] is going to the place where most people get relief."

The state bond measure before Congress isn't likely to address one of the fundamental problems for the refinance programs: many borrowers don't qualify because they have missed too many payments or owe more than their home is worth. Maryland, for instance, has closed 18 loans since its "Lifeline" refinance program was announced in June and has another 17 in the pipeline.

The Ohio Housing Finance Agency tried to boost participation in its subprime refinance program by relaxing underwriting guidelines, and ran an eight-week radio advertising campaign to boost awareness. Still, the program has refinanced just 37 borrowers.

Many borrowers "have credit problems that go beyond our expanded criteria," says Cindy Flaherty, director of special projects.

By: Ruth Simon
Wall Street Journal; April 5, 2008